Dollar flat vs. major currencies ahead of payrolls

European Central Bank lifts rates to 3.5% from 3.25%; more rate hikes seen

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar traded little changed against other major currencies Thursday, as traders squared positions ahead of a key U.S. employment report due Friday morning.

Late in New York, the dollar was quoted at 115.25 yen, compared with 115.23 yen late Wednesday. The euro changed hands at $1.328, from $1.3281.

The British pound traded at $1.9622, compared with $1.9661. The dollar changed hands at 1.1956 Swiss francs, compared with 1.1959 francs.

The euro fetched 153.07 yen, compared with 153.11 yen, following the European Central Bank's decision to raise short-term interest rates to 3.5% from 3.25%. The decision was widely anticipated and represents the sixth increase in a year. See full story.

ECB President Jean-Claude Trichet said that rates remain accommodative and that the central bank will monitor risk very closely. The phrase "very closely" is "usually ECB-speak for a rate hike in two or three meetings," said Brian Dolan, director of research at Forex.com, a division of Gain Capital.

However, Dolan added, "to the extent that Trichet has not given any concrete signals for the timing of the next rate hike, his comments are disappointing for euro bulls."

Next, the currency markets will turn again to the U.S. economy. The government will report on nonfarm payrolls for November Friday at 8:30 a.m. Eastern. Economists surveyed by MarketWatch currently expect an increase of 112,000. See Economic Preview.

The number of new filings for state unemployment benefits declined sharply in the latest week, reversing a large increase in the previous week, the Labor Department said Thursday. On Wednesday, a survey from Automatic Data Processing showed the U.S. private-sector added more jobs than expected last month.

Boris Schlossberg, senior currency strategist at FXCM, said if employment growth shows resiliency, the whole recession scenario may have to be revised, which will prompt "speculative accounts to cover their recently placed dollar shorts." A short position is essentially a bet that prices will fall.

ECB rate outlook

The ECB is expecting growth to be between 2.5% and 2.9% in 2006 and between 1.7% and 2.7% in 2007, which both were upgraded from past forecasts due to energy price declines. But inflation forecasts were revised lower to a range between 1.5% and 2.5% in 2007 and between 1.3% and 2.5% in 2008. Upside inflation risks remain, Trichet said.

The central bank chief said it would be "wrong" to conclude that the bank will lift rates again in February.

But David Brown, chief European economist at Bear Stearns, said "there was a definite hawkish tenor" to Trichet's press briefing which implies a continuing tightening bias to rate policy next year. "The ECB would be far happier" with rates peaking at 4.0% rather than 3.75% next year, he said.

Natascha Gewaltig, an economist at Action Economics, expects the ECB to pause for "slightly longer than the current two months cycle" due to the uncertainty about the global growth outlook and about the impact of the German value-added tax hike on growth and inflation. Gewaltig expects the ECB to hike rates by 0.25 percentage point rate in March.

Sterling eases as rates left steady

Elsewhere, the British pound pulled back against the dollar after the Bank of England left its key interest rate unchanged at 5%. The decision was in line with expectations. See full story.

Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York, said there are "increased signs of toppishness in cable, making $1.9550 a realistic target" before end of the week. Friday's payrolls "could help extend profit-taking" in European currencies, he said.

Also on Thursday, the People's Bank of China issued a report saying that if the U.S. current account deficit continues to grow faster than GDP, "the willingness of investors to continue holding and buying U.S. financial products may weaken." The bank warned that "a significant drop in the U.S. dollar" was a possibility.

The greenback also fell against the yen on continued speculation the Bank of Japan may raise interest rates this month. Kiyohiko Nishimura, a board member of the central bank, said that "small surprises cannot be avoided." Hiroshi Watanabe, vice finance minister for international affairs said recent data did not show deterioration in economic conditions.

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